Assume the options mentioned below are European style, have the same maturity date, and are written on
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Assume the options mentioned below are European style, have the same maturity date, and are written on stock MNP. Ignore any discounting between the date at which an option is purchased and the date it matures. Stock MNP costs $30 today.
- Suppose an investor purchases a "bear put spread" (i.e. she buys one put option P1 for $5 with a strike of $35 and sells one put option P2 for $2 with a strike price of $30). Draw the payoff and profit of the portfolio.
- What are the advantages and disadvantages of this trade? What do you suppose the investor is trying to do with this trade (i.e. what is her goal)?
- Give an example of when this trade would be counterproductive (i.e. when would this trade provide payoffs that are opposite the goals of the investor).
Related Book For
Financial Reporting and Analysis
ISBN: 978-1259722653
7th edition
Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer
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